Swiss Investors May Lose Access to US-Domiciled ETFs
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Update 2024: We can still buy US ETFs with IB.
Since the beginning of 2019, Swiss investors cannot buy Exchange Traded Funds (ETFs) domiciled in the United States from my previous broker, DEGIRO. This event is bad news for Swiss investors.
This problem is due to new regulations that will come into play. These regulations have already affected all European investors since 2018. But Switzerland was not affected before. We will see what has changed. These issues are based on several European and Swiss laws.
These laws are sad news for European and Swiss investors. I am not a legal expert, so this is only my interpretation of these laws. If I am wrong or I missed something, please let me know!
Normally, this should only come into effect in January 2022. But DEGIRO implemented this earlier, cutting Swiss Investors from the best ETFs available. I have now switched to Interactive Brokers.
In this article, we will see why this is happening and what our different options are. There are several possible solutions to this issue, but none of them is perfect, as we will see.
2024 Update
Before you read this entire article, you should know that as of 2024, we have not lost access to US ETFs with Interactive Brokers as Swiss residents. Some other brokers are still allowing it as well.
These brokers provide execution-only access to these US ETFs, and as such, they are not prohibited from doing so by the new laws. However, they cannot recommend these ETFs directly.
I do not think we have seen the last about these regulations. But currently, what matters is that we still have access to these ETFs.
PRIIPs Regulation for European investors
It all started in January 2018, when PRIIPs regulations entered into effect. PRIIPS is a part of the bigger Markets in Financial Instruments Directive (MiFID) II law. PRIIPs or Packaged Retail and Insurance-based Investment Products is a regulation that is supposed to protect investors. I will not go into details about the law.
I will only focus on the part that is the problem now. These regulations require all funds to provide a Key Investor Document (KID). This document must provide information about the funds and some standardized advice and recommendations to investors. Supposedly, it was made to ensure that all investors have access to all the necessary information to invest in these funds.
When this law came into force, U.S. fund providers did not provide any KID documents, so brokers stopped offering them to their European customers. For these fund providers, where most clients are from the U.S., providing these documents is not a priority. Doing so is too costly for little advantage. For instance, Vanguard already stated that they would not comply with these regulations. That means that for European customers, the only option is to use European ETFs.
Forcing people to invest in European Funds is what the European Union wanted. This law has nothing to do about protecting investors. It is only a strategy by European fund providers to force European investors to invest in their sub-par funds instead of better U.S. funds. Instead of providing better funds, they forced people to use their funds. Forcing people to invest in their funds is sad. This law is supposed to protect investors. But it is doing them a disservice by forcing them to invest in inferior products and reducing their investment options.
PRIIPs regulations are enforced to people from the European Economic Area (EEA). And Switzerland is not part of the EEA. Therefore, Swiss investors were not affected by this problem last year.
So why am I talking about this issue? DEGIRO just stopped offering these ETFs to its Swiss customers. I can still sell my positions. But I cannot buy any more of these ETFs. It is because of a new set of Swiss laws that will soon come into force. Let’s take a look at these Swiss laws now.
FinIA/FinSA for Swiss investors
In 2018, the Swiss government voted two new laws: the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). Once again, I will not go into details about these laws. They are more or less a copy of the European laws for Swiss investors. They also enforce each fund to offer a Key Investor Documented (KID) to all Swiss investors. So, they cause the same issue to Swiss investors that PRIIPS caused to European investors.
Once again, I have the same perspective on this law as I have on the other one. It is just a crude attempt to force people to invest in bad funds and block the U.S. funds instead of improving European funds.
This new set of laws will enter into force on January 1, 2020. However, several of the items will take longer to become active. From my understanding, access to U.S. ETF may be compromised only in 2022.
While I am not a lawyer and could definitely be wrong, the laws are only set to prevent actual recommendations of non-US ETFs. This means that the execution of trades on these ETFs is still allowed. So, as long as a broker is executing only for these ETFs, the law should not prevent the transactions.
From January 2022, brokers will not be able to recommend any US ETF to Swiss investors. At this point, many brokers have stopped offering access to these ETFs entirely.
Why did DEGIRO already enforce this two years in advance? It seems that DEGIRO started implementing them early for their own reasons. Supposedly, they believed this would protect the investors.
I think they are doing that to simplify their systems so that all Europeans have the same set of offers. This is a bad move on their side. There has been no communication whatsoever about this. One morning, my products were closed with the message “Product is closed for the client.” In my opinion, DEGIRO could have handled the situation better.
So, what can we do? I see a few solutions to this problem. Let’s examine each one.
Solution 1: Change broker?
If you want access to US ETFs, you must use one broker that allows it. It is what I did by switching from DEGIRO to IB. And I currently can invest in U.S. ETF. It is worth changing brokers just for this reason.
Interactive Brokers already stopped offering these ETFs to European investors, per the law.
Normally, this should not happen to IB for Swiss residents because IB is providing execution-only access to these ETFs. But if the regulations change or if the interpretation of the law changes, we will need to find a new solution.
Solution 2: Change funds?
Another solution is to comply with the new dumb law and switch to European-domiciled funds. We will not lose access to U.S. stock market indexes, only U.S. funds. There are equivalent Europeans tracking the same indexes. However, this is not a very good solution. European funds are more expensive and smaller. And there is less choice for funds around.
For instance, I will miss Vanguard Total World (VT). This fund replicates the performance of the entire world market. It manages around 17 billion dollars of stocks and has a Total Expense Ratio (TER) of 0.10%. It is made up of more than 8,000 different stocks. VT is a great ETF.
On the European side, there is no full world ETF, at least not in the acceptable TER range. The closer they get is with Developed World ETF. But that still means it is necessary to own several ETFs instead of a single one.
If I had to choose one European Developed World ETF, I would probably go with iShares Core MSCI World UCITS ETF. It has around 1600 stocks in 23 developed countries and manages more than 14 billion dollars. It has a TER of 0.20%. That is twice as expensive for an inferior fund. It is not bad, of course. But it pales in comparison to VT.
If I were to switch to the European equivalent of VT, I would probably have to hold two funds, and they would be more expensive than VT. So, I am not convinced by this solution. This is another sign that these laws are not doing anything good for investors.
To learn more, you can check out the entire ETF Portfolio with European Funds I would have used.
Solution 3: Use several funds?
The next solution I am thinking of is to use European funds but not a World fund. It is possible to replicate the performance of a world fund by holding several regional funds. Of course, it is still better to own the world fund if it is a good option. But in Europe, there is no great option for a world fund.
The Vanguard Total World (VT) ETF is composed of stocks from these regions:
- North America: 58.40%
- Europe: 18.60%
- Pacific: 13.30%
- Emerging Markets: 9.40%
- Middle East: 0.20%
- Other: 0.10%
We can safely ignore the last two ones and still replicate the world market fund’s performance accurately. That means we would need to hold four funds. You need one U.S. ETF, one Europe ETF, one Pacific ETF, and one Emerging Markets ETF. If you want to have better accuracy, you could also add Canada that is usually included in North America. Or you could find a North American ETF. But I did not find a good one.
It is not a great solution, but this would still beat a world ETF from a European provider. It would be a better TER. You can find U.S. ETF around 0.07% in Europe. And since the U.S. is about 55% of the VT ETF, this would bring down the global TER.
The problem is that you have four funds instead of one. I think that simplicity should be preferred in a portfolio. It may make rebalancing a bit more complicated as some funds may underperform or outperform the others. And you may have to change the allocations if there is a shift in the world’s economy. But I still think it beats having a 0.20% TER fund.
Solution 4: Be a professional investor
You may have noticed that I have talked especially about retail investors in this article. This is because both European and Swiss laws consider different professional investors and retail investors.
They only apply to retail investors. So, if you are a professional investor, you can still use the good old U.S. funds! I am not a professional investor, and I doubt that you are either. However, there is a kind of loophole in the Swiss version of the law. It states that certain high-net-worth individuals may choose to opt out of the law and be treated as professional investors. There is also this loophole in the European version of the law, but the conditions are slightly different.
In the law, a high net worth individual is described as one that:
- Either declare that they understand the risks of the investment under their qualification and have at least 500’000 CHF.
- Or dispose of at least two million CHF.
We can see that there is a loophole for the rich. The European Union does not want to hurt the rich in the European Union. This is another stupid part of this law. I am far from filling out these conditions yet. But it is not rare in the personal finance community to see people with more than 500’000 CHF. They could apply to opt-out and be considered professional investors.
Now, I do not know how difficult it will be to opt out. And I do not know if this will qualify you as a professional investor for taxes. In this case, capital gains will be taxed. That is something to consider. But it could be a very good option for people who already have a high net worth. It is something I may do in a few years.
FAQ
Why can’t Europeans invest in U.S. ETFs anymore?
Since 2018, PRIIPS regulations have disallowed European investors to invest in U.S. Funds. These regulations only allow investment in funds with a Key Investor Document (KID). And U.S. funds and ETFs do not provide this KID.
What are the PRIIPS regulations?
Packaged Retail and Insurance-based Investment Products are regulations to protect European investors. They prevent them from investing in funds without a Key Investor Document (KID), which in practice prevents European investors from investing in U.S. Funds. The need for KID is part of the biggest set of laws called the Markets in Financial Instruments Directive (MiFID).
What are the FinIA/FinSA laws?
The Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) are the Swiss equivalents of the MiFID laws from the European Union. These laws will enter into effect in January 2020 but will only affect foreign brokers in 2022. Effectively, they should prevent Swiss investors from investing in U.S. funds.
Conclusion
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The possible future loss of U.S. ETFs is sad news for European and Swiss investors. The best alternative is to invest in European funds, but they are more expensive and offer fewer choices.
I think that the people who crafted this law did not care about Swiss investors but only about European fund providers. There is no doubt that this will profit European funds. Maybe in the future, it will increase their quality and price. But I am not very confident about that. It is a local lockdown of the market. Instead of protecting the customer, they are locking him into inferior choices.
Because DEGIRO handled this law poorly, DEGIRO users had already lost access to U.S. ETFs several years in advance. I lost confidence in DEGIRO, so I switched to Interactive Brokers.
Currently (as of 2024), since IB is providing execution-only access to these ETFs, we can still trade US ETF with IB.
If you are still using DEGIRO and want access to U.S. ETFs as a Swiss Investor, I recommend switching to Interactive Brokers.
To see an ETF Portfolio without any U.S. ETF, take a look at my European ETF Portfolio.
If you are considering U.S. ETFs, you may want to read about the U.S. estate tax.
What about you? What will your strategy be when we do not have access to U.S. funds anymore?
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It seems to me that for an EU based investor the Europe domiciled ETFs have the major advantage of being denominated in euros. This means that you dont get the additional (uncompensated) exposure to currency risk that comes with dollar denominated ETFs. In terms of risk-adjusted returns that should more than make up for a TER of 0.2 rather than 0.1 no? So in that sense I think these laws are helping the average investor quite a bit, even if the purpose is to keep capital in Europe xp.
For swiss investors no luck i guess :/ since there are no liquid CHF denominated world ETFs I know of.
Hi Klackon,
Actually, that’s incorrect. The currency the ETF is denominated in has no incidence on the currency exposure.
Most of the Vanguard European funds are denominated in EUR and GBP for instance. But inside, they hold USD! So, they do not do anything for currency exposure.
This is a common misunderstanding of currency denomination.
If you want to protect about currency exposure, you need to use currency-hedged ETFs. You can read about currency hedging.
Hi Mr. Poor Swiss,
but isn’t there a risk for non US resident/citizen investors that there will be the levy of an estate tax of between 26% and up to 40% on the balance on the holder’s death ? Which would make Europe domiciled ETFs way better even with slightly higher fees.
Hi,
I have an article about that: U.S. Estate Tax.
Hi,
Good article, thanks. Do you have more information about how to become a professional trader. Is there any agency in Switzerland who can certify you as a prof trader?
Thanks in advance,
Zoltan
Hi Zoltan,
If you want to become a professional investor just to be able to keep U.S. ETFs, then you just need to have a large net worth invested in the stock market.
If you want to learn about professional trading, no, I have no idea.
Hi Mr. Poor Swiss,
firstly thank you so much for sharing your experience and knowledge about investment and finance with us poor mortals.
I am in my 40s and thought that the idea of being financially independent and “early” retirement were not for me because you know, “only” 20+ to go.
Well, now, I believe that it is never too late and this awesome blog (alongside JL Collins, Mr. RIP, Mustachian…) has changed my mind. At least, not letting my money getting stolen without a fight until my retirement!
Anyway, let’s assume losing access to US-Domiciled ETFs happened in 2022. I was wondering about the dividends.
I found something about dividend reinvestment with interactive brokers, https://www.interactivebrokers.com/en/software/am/am/manageaccount/dividendreinvestment.htm
Sure it cannot replace investing each month a certain amount but what do you think? Still worth doing it?
Thank you again for sharing, keep the good work mate!
Hi JohnDoe,
Congratulations on starting to invest! As you said, it’s never too late!
I have no idea if the dividend reinvestment plan would work on an ETF that we do not have access to buy. You would have to ask IB about this.
For me, this feels too much like a gray area. Once we (and if we) lose access to U.S. ETFs, I will simply switch to European ETFs and reinvest my U.S. ETFs dividends into the European ETFs. It could make it a little more optimal to reinvest the dividends in the U.S. ETFs themselves, but it honestly does not feel worth it. But it’s a good idea for extra optimization.
Thanks for stopping by!
Hello Mr. Poor Swiss,
I have just started considering doing some of the investments on my own , still own a portfolio managed by UBS. Was planning to go ahead with the Vanguard World VT for a start, do you think is still worth it since there may be less than 1 year left for buying it? Or would you rather recommend to already start with the European alternatives that you suggested in the other article? best regards, Radu
Hi Radu,
Yes, I still think it’s worth it. We are still not sure what will people. So I recommend investing now in VT and adapt in the future if necessary.
Hi Mr Poor Swiss,
Firstly thanks for all the good information.
Would you by any chance know what is bound to happen to the current ETF we are holding?
I am currently trying IB, Degiro and Swissquote (with which I started but the fees are ridiculous). Especially with more recent ETFs like ARK or the SPAC ones, it’s a major loss of opportunities. On Swissquote they still can be bought, but you need to accept the terms about the NACH / qualified investor… although they can be simply acknowledged – what are the consequences if we can’t proof eligibility at some point?
Thanks for everything and a great start into 2021!
Hi Steve,
When (and if) this happens, you will still keep the shares of your ETFs but you will only be able to sell them, not buy more. That’s what happened at IB and DEGIRO. But maybe some brokers would force you to sell the shares. But you would not lose your money.
Regarding the qualified investor thing at Swissquote, I have absolutely no idea. I would recommend contacting them to know exactly what this means and what is the eligibility.
Have a great start into 2021!
Hi Mr Poor Swiss,
Called Swissquote – they haven’t got any news yet on what will happen once the laws are put in place 2022, but most likely you simply cannot buy any more. They either let you hold the current amount or request you to sell it.
For the part of qualified investor, seems to be a formality whereas even if you do not meet the qualified investor requirements you can simply accept it. They say it’s there to make sure you are aware/accept ETF trading risks. There are no legal obligations to proof it or otherwise.
Will continue to invest but also ease off Swissquote as want to set some stop losses for potential market crash and cannot be bothered to pay 15-20$ each trade.
DEGIRO quickly has become too simple for my taste and lack of ETF’s aren’t making it a favourite. Still gonna try one/two more brokers and then decide where to go.
Have a great day!
Hi Steve,
Ok, it’s good to know that you can still access these ETFs without too big of a downside.
Thanks for sharing this!
Hi, I stumbled over your very interesting blog yesterday. Great stuff :)
You advice investing in US domicile ETFs. Are they not subject to “US Situs Assets” inheritance tax (as soon as individual possesses more than $60’000)?
I thought to be safe you have to buy Europe domicile ETFs (including those Blackrock and Vanguard ETFs you consider inferior choices for Swiss residents) and avoid ALL US domicile securities.
Can you please clarify this important point?
Thank you very much for all the information you share with us!
Hi Patrick,
That’s a common misunderstanding about the U.S. Estate Tax.
I have an entire article about that: U.S. Estate Tax and Swiss investors.
This should help :)
Thank you very much and I wish you a good step towards your FI in 2021!
I am transitioning from Degiro Custody to IB after their communication regarding “complex stocks”, i.e. stocks they arbitrarily blocked Custody users from trading on Monday, 03.08.20, was just as sudden and without reason as you described here in the article, although I guess I will have to live with IB’s fees after the three months. Feel free to check out my video, where I have cited your blog insights (e.g., about European ETFs): https://youtu.be/XEjKBX8_tiQ
Hi Daniel,
Thanks for sharing. Unfortunately, my German sucks, so I am not able to understand your video. Care to share the communication regarding complex stocks?
Thanks for stopping by!
Hi Mr Poor Swiss, thanks for your knowledge sharing, it’s invaluable!
As far as I understand this limitation applies to the base country of the broker/platform and not the investor. Given that the UK officially left the EU in early 2020 and Interactive Brokers is a UK-based platform, that might mean that IB platform users have access to US domiciled ETFs regardless of their place of domicile.
Would you know if that’s the case?
Hi Kranz,
I do not think this is entirely correct. The limitation applies mainly to the investor. Even a U.S. broker could not give access to french people to U.S. ETF. It would be against the Mifid rules.
Now, in the Swiss rules, there seems to be different rules based on the broker as well. But the Swiss rules apply to all Swiss investors, regardless of the broker.
But with UK going out of the EU, it is possible that UK investors will get back the access to U.S. ETF, but I think this is way too early to tell.
But I do not think this means all EU investors will get back access.
Now, I am no law expert at all, so I may be wrong and this could be good for EU investors.
Thanks for stopping by!
The regulations are based on investor country of residence, not broker nationality. Also, as part of its Brexit transition, the UK has already copied PRIIPS into UK law, so Brexit will make no difference to this problem.
Very interesting article.
I am from Greece, in which I use Degiro, of course with only the UCITS ETFs.
However, in my eToro account, I still have access to US ETFs.
Before someone says that those are CFDs, I should say that I own the underlying asset, according to their statement.
I have researched thoroughly and I cannot find what loophole they are using, and this makes them seen unreliable somehow.
Any opinion?
Hi Chris,
If you are greek, then it’s weird because it should have been blocked.
I have read a few times that some accounts on etoro are not region-locked. I do not know exactly what this means since I never had an etoro account. But it seems quite weird.
This may be their loophole, but I am honestly not sure there is even a loophole, except when using derivatives.
Did you try asking them directly? (At the risk of losing your access to U.S. ETF).
Sorry to not be able to help you more
Thanks for stopping by
I’m British but used to work in Zurich and still have a CHF account there and will probably want to release my CHF’s into the equity markets in Q2/Q3 or may be even later.
It is good to hear that the law will only apply to IB starting in 2022. I have a rather inactive USD denominated Charles Schwab (CS) account that I opened more than a decade ago. Personally for me IB is attractive as you can hold multiple currencies but is there any reason why one can’t open a CS account to get around this limitation?
Hi Lakshman,
I never did any research about Charles Schwab. Do they really accept Swiss customers (or British)? If so, it could be interesting.
It seems that they only offer access to the U.S. Market. Can you invest in Swiss ETFs from CS?
Thanks for stopping by!
I open my CS account as a UK resident with my UK passport for the usual ID check. And I do also vaguely recall them telling me that I should still remain as a UK resident on my W8-BEN even when I was a resident in Switzerland as it would be more advantageous for tax purposes.
I think you can trade in a number of exchanges but I note that you cannot hold CHF as a currency in their accounts. I’ll have to look into this in more detail before I open the IB account.
Apologies for the numerous typos!
Hi Lakshman,
That could be an interesting option indeed for people that do not want to trade in CH securities.
Thanks for sharing!